Rauner finds a tax he likes

But Hydro CEO George Harris hates it

The anti-tax candidate now favors extending the Illinois sales tax to services.

In a topsy-turvy move, Bruce Rauner's proposal to tax printing, computer programming and attorneys' fees puts the Republican nominee for governor at odds with not only Gov. Pat Quinn but also some of Mr. Rauner's tax-weary business supporters. (See the PDF of Mr. Rauner's proposal.)

For Mr. Rauner, raising taxes by more than $600 million a year on the booming service sector is necessary to partly offset the loss of revenue if he is to keep a campaign promise of lowering income taxes.

Most other states tax many more services than Illinois, and Mr. Rauner's proposal starts off light by leaving several big service industries alone while going after ever-unpopular lawyers and a slew of relatively small service industries. But even if Illinois is playing catch-up, his proposal is already seen by some as opening a new door to taxes that they would rather keep closed.

“Ultimately, it will drive more companies out of Illinois,” says George Harris, CEO of Chicago-based Hydro Inc., a testing lab for oil refineries and other big users of industrial pumps.

“We wouldn't eat the tax,” he adds, but passing it on to customers would make it harder to sell his services. “In Chicago, in particular, there's a lot of sales tax to begin with.”

Iowa, Wisconsin and six other states already tax lab testing services, but “not Indiana,” he notes.

'REGRESSIVE'

According to Mr. Rauner, imposing sales tax on nonmedical testing labs could raise more than $11 million a year, a fraction of the $603.4 million he proposes to raise on 32 services, ranging from advertising to warehousing and marketing consulting.

But his plan exempts all medical services. Taxing physicians, dentists and nursing homes—as four other states do—would generate well over $1 billion a year.

Mr. Quinn in March announced his opposition to new service taxes, believing they fall most heavily on lower-income people and small businesses. “Service taxes are regressive because they are not based on your ability to pay,” a campaign spokeswoman says. “Why are you going to tax trailer parks and printers?”

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Most economists would differ, arguing that wealthier people spend relatively more on services. But Mr. Rauner is to some extent on the same page as Mr. Quinn.

Mr. Rauner would exempt “day-to-day items like laundromats, day care centers, barber shops and animal care,” according to his proposal. But “charter airplane flights, interior decorating and marina towing are tax-free,” he notes. “It's not right.”

Attorneys account for $167.4 million of the revenue to be raised under Mr. Rauner's proposal, but for unstated reasons he excludes accountants, architects and engineers, which combined would raise more than that. A campaign spokesman declines to elaborate.

“We would be opposed,” says Jim Covington, director of legislative affairs at the Illinois State Bar Association in Springfield. It's not a tax on lawyers, he says. “It's a tax on their clients, often vulnerable people of modest means.”

While Mr. Rauner's pro-business message has drawn strong support and millions of dollars from Illinois executives, those targeted by his service tax proposal find it upsetting. “He's been to my plant; never once did he talk about this,” says Mike Nobis, president of 107-year-old JK Creative Printers & Mailing in Quincy. “For me, this is a real deal breaker. When candidates say one thing and end up doing another, who do you vote for? The real danger is that people will stay home and not do anything.”

Any broad-based service tax would generate broad-based opposition, but tax experts on the right and left argue that Illinois could use a serious debate on the topic, given the state's deficit problems and its over-reliance on a sky-high sales tax on goods.

Services made up nearly half of Illinois' economy in 2009, up from 32 percent in 1977. At least $4 billion could be raised from a broad-based service tax, says the Commission on Government Forecasting and Accountability, the Legislature's research arm. Illinois taxes only 17 services, while the average state taxes 56. (See the PDF.)

“The problem is that Illinois has a narrow base and high rates,” says Thomas Johnson, former state revenue director and president emeritus of the Taxpayers' Federation of Illinois. “If you want to be responsive to economic growth, since the service sector is growing faster, we would be better off if we broadened our sales tax base to include services.”